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Non Spouse Beneficiary Rollovers

“My client, who is a nonspouse beneficiary of a deceased 401(k) plan participant, requested and received a distribution of the inherited account balance.  Can she complete a 60-day rollover?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

  • No, the IRS does not allow nonspouse beneficiaries to complete indirect or 60-day rollovers of amounts received from a 401(k) plan.
  • If a nonspouse beneficiary wants to complete a rollover of inherited plan assets, he or she must do so through a “direct rollover” to an inherited IRA.  (See IRS Notice 2007-7  Q&A 15). The Pension Protection Act of 2006 introduced this option for nonspouse beneficiaries, effective for 2007 and later years. The direct rollover option for nonspouse beneficiaries applies to IRC §401(a) qualified retirement plans, as well as IRC §§403(b) and governmental 457(b) plans.
  • A direct rollover is a transfer of plan assets from the trustee of the plan to the trustee of the inherited IRA (i.e., a trustee-to-trustee transfer), without receipt by the beneficiary of the assets.
  • A qualified plan can (but is not required to) offer a direct rollover of a distribution to a nonspouse beneficiary, provided the distributed amount satisfies all the requirements to be an eligible rollover distribution.
  • The direct rollover must be made to an IRA established on behalf of the designated beneficiary that will be treated as an inherited IRA. If a nonspouse beneficiary elects a direct rollover, the amount directly rolled over is not includible in gross income in the year of the distribution.
  • The receiving IRA must be established in a manner that identifies it as an IRA with respect to the deceased plan participant and the beneficiary, for example, “Tom Smith as beneficiary of John Smith.”
  • If a nonspouse beneficiary receives an amount distributed from a plan, the distribution is not eligible for rollover, and is includible in income in the year of the distribution.

Conclusion

The plan-to-IRA rollover rules for nonspouse beneficiaries are different than those that apply to spouse beneficiaries. If a nonspouse beneficiary wants to complete a rollover of inherited plan assets, he or she must do so through a direct rollover to an inherited IRA.

 

 

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© Copyright 2017 Retirement Learning Center, all rights reserved
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Valuing Life Insurance

 

“Is there any guidance on valuing a life insurance contract distributed from a 401(k) plan?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

  • Fortunately, there is.  The IRS has provided safe harbor rules for determining the fair market value of life insurance contracts distributed from a qualified retirement plan in Revenue Procedure (Rev. Proc.) 2005-25.
  • Under Internal Revenue Code Section (IRC §) 402(a), amounts distributed to a plan participant, generally, are taxable in the year in which they are paid to the employee.
  • Treasury regulations (Treas. Regs.) provide that the cash value of any retirement income, endowment or other life insurance contract is includible in gross income at the time of the distribution [Treas. Reg. § 1.402(a)-1(a)(2)].
  • However, sometimes the stated cash surrender value of a contract does not accurately reflect its actual fair market value.  In Rev. Proc. 2004-16, which was superseded by Rev. Proc. 2005-25, the IRS provides a formulaic approach to valuing a life insurance contract. The IRS issued the rev. procs. primarily to address the issue of a “springing cash value plan,” a policy in which, for the first few years, the cash surrender value of the policy is much lower than the value of the premiums paid or the reserve accumulations (Internal Revenue Manual 4.72.8.5.3).
  • Plan sponsors should ensure providers of life insurance contracts and plan record keepers are following the guidance of Rev. Proc. 2005-25 when determining the fair market value of a distributed life insurance contract.

 

Conclusion

Sometimes the stated cash surrender value of a life insurance contract does not accurately reflect its actual fair market value. Rev. Proc. 2005-25 provides a safe harbor means to calculate the fair market value of life insurance contracts.

 

 

 

© 2017 Retirement Learning Center, LLC

© Copyright 2017 Retirement Learning Center, all rights reserved
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Multi and Multiple Employer Plans: What’s the Difference?

“I’ve heard the terms ‘multiemployer plan’ and ‘multiple employer plan;’ is there a difference?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

  • Yes, there is a difference, and knowing the distinction is important. The two terms are often confused.
  • A multiemployer plan refers to a collectively bargained plan maintained by more than one employer, usually within the same or related industries, and a labor union. These plans are often referred to as “Taft-Hartley plans” [(ERISA §§ 3(37) and 4001(a)(3)]. Multiemployer plans must comply with the qualification rules under IRC §414(f).
  • Multiemployer plans allow employees who move among employers within unionized industries – such as trucking, construction and grocery-store chains – to participate in the same retirement plan negotiated under either separate or common collective bargaining agreements.
  • For in-depth guidance on multi-employer plans, please refer to the IRS’ Internal Revenue Manual, Part 7, Chapter 11, Section 7.11.6
  • In contrast, a multiple employer plan is a plan maintained by two or more employers who are not related under IRC §414(b) (controlled groups), IRC §414(c) (trades or businesses under common control), or IRC § 414(m) (affiliated service groups). Multiple employer plans must comply with the qualification rules under IRC §413(c).
  • The Department of Labor provided some important guidance on the treatment of multiple employer plans in Advisory Opinion 2012-04A .
  • For in-depth guidance on multiple employer plans, please refer to the IRS’  Internal Revenue Manual, Part 7, Chapter 11, Section 7.11.7

 

Conclusion

The terms multi- and multiple employer plans are often confused. Knowing the difference is important as they refer to two completely different types of plans that involve more than one employer.

 

 

 

© 2017 Retirement Learning Center, LLC

© Copyright 2017 Retirement Learning Center, all rights reserved